Can you live without a credit card?
That notion probably seems ridiculous to many people. On average, consumers have 3.1 credit cards, according to 2017 data from the credit bureau Experian. But credit cards aren’t for everyone. While life without credit cards poses some challenges, it might not be as difficult as you think.
“I don’t think everyone needs a card,” says Chris Dlugozima, education specialist at GreenPath Financial Wellness. “Many of our clients will live life without credit cards as a factor of paying down their debt.”
Before applying for a card, examine your financial circumstances — and spending habits — honestly, and ask yourself whether you are likely to use your new credit card responsibly.
The Advantages of Credit Cards
For many people, credit cards can be a great tool. Convenience — and an enhanced ability to organize your finances — are among the biggest perks of having a credit card, Dlugozima says.
[Read: Best Starter Credit Cards.]
“By putting things on your credit card, you have the ability to get just one bill,” he says.
Used responsibly, credit cards can help you build a solid credit history, which is especially appealing to young adults just starting their financial lives.
Rewards programs are another great reason to own credit cards, Dlugozima says. “Some debit cards have rewards, but some of the best deals out there are often on credit cards.”
Credit cards offer protections when you make purchases. For example, you can dispute transactions if a merchant fails to deliver a good or acts in an otherwise fraudulent way.
By federal law, you also are only responsible for $50 of unauthorized activity on your credit card account. Many credit card companies extend protections beyond this level, offering their customers zero liability in instances when a credit card is used fraudulently.
The Disadvantages of Credit Cards
Despite these advantages, not everyone should have a credit card, says Nancy Bistritz-Balkan, vice president of consumer education and advocacy at Equifax.
“The key with credit cards is to use them responsibly by paying your bills on time,” Bistritz-Balkan says. People who struggle to stay out of debt and keep up their payments are probably better off without credit cards, she adds.
Dlugozima says studies have shown that people spend more overall when they transact with credit cards instead of cash. “They’re more likely to spend more money (with a credit card) than if they have that pain point of just handing over the cash.”
In many cases, the positive aspects of credit cards can quickly turn into negatives if you do not use them responsibly. For example, while credit card use often helps you build a strong credit score, it also can have the opposite effect.
“If someone starts accumulating debt — especially if they start maxing out a card or if they start to fall behind — it really is not going to have a positive impact on their credit,” Dlugozima says.
And of course, it costs money to carry a balance on your credit cards. According to a report from U.S. News, the annual percentage rate for credit cards is typically between about 16 and 23 percent.
Building Credit Without Credit Cards
While life without credit cards makes sense for some people, it also presents a few challenges. For many young people, a credit card is the first opportunity to build credit. Living without a credit card makes it more difficult to establish a credit profile.
Fortunately, other options for building credit exist. For example, young people can use student loans to build their credit profile. Around 30 percent of U.S. adults report borrowing money to pay higher education costs, according to a 2017 Federal Reserve report. “Timely repayment of those student loans will be reported to the credit bureaus,” Bistritz-Balkan says.
Rental payments are sometimes reported to credit bureaus, though it’s rare. When looking for places to rent, ask if your monthly payments will be reported, Bistritz-Balkan says. Or, you can use a service that will report your rent payments to credit bureaus.
Other ways to build up your credit profile are to become an authorized user on a responsible credit user’s account or to take out an auto loan or lease and make timely car payments.
Getting a secured loan, also known as a collateral loan, is another way to potentially build credit. With these loans, you use a valuable asset as collateral, such as funds in a savings account or a car. If you default on the loan, the lender can collect your collateral. Securing the loan with collateral lowers the lender’s risk, so you’re more likely to be approved, even if you don’t have good credit. If you pay the loan back according to terms, with on-time payments, it can help you build a positive credit history.
Dlugozima cautions that you will pay some interest on such a loan. But he still sees it as a good way to build credit without a credit card, especially if you are disciplined enough to use it as a tool to build credit, rather than to increase spending.
Renting a Car Without Credit Cards
Both Bistritz-Balkan and Dlugozima agree that trying to rent a car is among the biggest challenges for people who do not hold a credit card.
Bistritz-Balkan says it is possible to rent a car using cash or a debit card. But she urges you to call prospective rental companies first to learn their policies. In many cases, there will be strings attached to renting a car without a credit card, she says. “Some rental car companies will rent a car to you if you use a debit card, but require a credit check.”
[Read: Low-Interest Credit Cards.]
Dlugozima adds that many car rental companies will place a hold on funds in your bank account. The amount is usually equal to the estimated rental charges and a deposit of typically at least $200. They might require you to produce documentation, such as pay stubs or utility bills in your name. At airport locations, you might need to show your itinerary.
Although policies vary from company to company, trying to rent a car without a credit card is almost sure to create some challenges. “All the (companies) that I’ve looked at are going to have certain hurdles to jump through,” Dlugozima says.
Other Challenges of Life Without Credit Cards
Other times when life without a credit card can become challenging include:
— Financial emergencies: If you don’t have an emergency fund, credit cards offer a quick source of money in emergency situations, such as when your car breaks down.
— Shopping online: Credit cards offer an extra layer of safety when transacting over the internet. If thieves get access to your debit card, they can drain all the money in your bank account.
While carrying large amounts of cash is not practical, alternatives to paying without credit cards do exist. “Consider other payment options, such as a debit card or prepaid card,” Bistritz-Balkan says.
Just be careful when using these other forms of payment. For example, while the Federal Trade Commission acknowledges that you can use debit cards for online transactions, it discourages you from doing so. If you have an issue with an online transaction, it can be more difficult to get your money back if you used a debit card, the FTC says.
Using a prepaid card — which has a limited amount of funds attached to it — can be a better alternative.
Finally, not having a credit card can pose challenges to your finances when making certain types of purchases. For example, hotels often will place a hold on a certain amount of money — sometimes up to hundreds of dollars — when you reserve a room.
This hold disappears in a few days, and you are unlikely to notice it if you use a credit card. However, a hold attached to a debit card will impact the amount of money you have access to in your checking account, leaving you unable to use that cash until the hold disappears.
Holds can even pop up in day-to-day spending situations, such as when purchasing gas.
“In a debit card, even though you eventually get the money back, if you’re living check to check, that hold is going to impact how much you have to spend in that account at that moment,” Dlugozima says.
Is Life Without Credit Cards Right for You?
Credit cards represent a mix of opportunity and risk. Some people love the convenience of using credit cards and stop using cash and debit cards altogether.
[Read: Best No-Annual-Fee Credit Cards.]
Others become “almost religious” in their conviction that credit cards are evil, Dlugozima says.
Knowing yourself — and your spending habits — is the key to deciding whether to use credit cards. In the end, the decision is a personal one.
“If you don’t think you would be able to meet your financial commitments in the way of paying a bill on time, every time, then you should not get a credit card,” Bistritz-Balkan says.
More from U.S. News
How to Keep Your Credit Card Number Safe Online
How to Avoid Paying Credit Card Fees
In Debt During the Holidays? 6 Ways to Keep Your Finances in Order
Do I Really Need a Credit Card? originally appeared on usnews.com
